Dealer and Manufacturer Margins

When retail dealerships carry only one product line, the size of the dealer margin is crucial to the success of both the manufacturer and the dealer. This article proposes a successive monopoly model of patterns in exclusive dealer and manufacturer margins across a product line. The predictions of the model then are compared with the pricing practices of a major U.S. automobile manufacturer and its dealers. The data support a special case of our theory. Our analysis also indicates that we cannot reject the hypothesis that the retail demand curves for these models are (locally) linear. Finally, we use the margin data to provide updated evidence on the extent to which retail prices depart from list price.